Who Would Really Pay a Carbon Tax?

Just before Thanksgiving I came across this opinion piece on the Internet where the writer bemoans the President’s apparent neglect of climate issues among his new priorities.  The writer favors a carbon tax on those naughty utilities that burn coal to generate electricity for our homes and businesses.

But who would ultimately pay such a tax?  These magic-money-tree thinkers, who don’t understand the economic process, tell us “a recent analysis from the Congressional Research Service found that a modest carbon tax of $20 per ton that rises 5.6 percent annually could cut the projected 10-year deficit by 50 percent — from $2.3 trillion down to $1.1 trillion. If designed correctly, a carbon tax could help shift the burden of paying for pollution (and solutions to it) from taxpayers to polluters…” No problem.

Unfortunately, we all know that if costs go up for utilities, the following will happen.  Utilities will petition their state boards that oversee rates seeking relief, that is, permission to charge us more.  Barring permission to do so, or perhaps in addition, these new regulations will make utilities appear as riskier businesses, causing investors to demand higher returns, causing share prices to fall (which would effect the value of pension funds, college endowments and similar conservative investments).  It will also increase their cost of raising capital for improvements either by selling more shares of now lower-priced stock or borrowing at now higher interest rate based on their higher risk.  Eventually they can use this as a basis to raise rates, passing the increased cost along to their customers.

The idea of polluters paying rather than taxpayers is fallacious.  The higher costs eventually get back to you and me.  It's a shame that this new tax will once again hit hardest those who can least afford to pay, by making it part of everyone's electric bill.

Maybe the President or one of his advisors understands that the time to raise taxes, directly or indirectly, on the poor and middle class is not when we are trying to avoid slipping back into recession as Europe recently has done – or maybe not.  This magic-money-tree thinking is everywhere!